INSUBCONTINENT EXCLUSIVE:
Did defaults by subprime borrowers cause the Global Financial Crisis, or regulatory negligence when Wall Street was going berserk with a
financial services are born out of compulsion to escape the regulatory hardship
So was the Credit Default Swaps (CDS), an insurance policy against default by a borrower.
Blythe Masters, a young executive at JPMorgan,
came up with the earliest version of CDS in 1994 that shifted the risk of loan default by Exxon to European Bank of Reconstruction and
That reduced the capital the bank had to keep and would be paid by the European Bank if Exxon defaulted.
While a protection against loan
default is a welcome innovation, how about writing protection for $100 billion on a $1billion loan Imagine halfa-dozen neighbours buying
insurance on a Maruti 800 that you own! Someone else is selling the insurance too
exactly what happened in financial services when regulators failed to do their jobs
In fact, the regulators had a chance to prevent CDS from becoming a pain when Delphi, an auto maker defaulted on a $2-billion loan in 2005
About $20-billion CDS was outstanding
Instead of clamping down, the believers in selfregulation permitted CDS trading without underlying assets.
The lack of supervision led to
ballooning of securitisation of subprime mortgages, trading in CDS, skewed incentives for paper profits and dilution of rating standards
view that regulators lacked the power to protect the financial system
than $60 trillion by 2007 from about a trillion at the turn of the century
This was possible with absence of regulation and the outsized bonus.
The tale of AIG, an insurance company is the best example
It received nearly $150 billion in bailout package while its chief Joseph Cassano received $200 million in bonus over the years.
Things have
The crisis led to regulators tightening norms for CDS
The outstanding notional value has shrunk to about $9 trillion now, data from the Bank for International Settlements show.
Derivatives and
exotic instruments are still traded
Asset prices are at record highs
30th anniversary of the 1988 Savings and Loan Crisis, and the 50th anniversary of the 1968 global protests against political and military
